Marketplace Fairness Act Stalls in Congress

The Marketplace Fairness Act, which was supposed to finally settle the question of how states can tax online sales, appears to have stalled in Congress after passing the Senate last year.

Last month, the House Judiciary Committee held a hearing to see if there was a way forward on the contentious legislation, which is currently blocked there. Committee chairman Bob Goodlatte, R-Va., has outlined a set of principles for any legislation that would get through his committee, but so far there appears to be little headway (see House Republicans Release Principles for Online Sales Tax Legislation).

The accounting firm McGladrey recently released a study on the current state of sales and use taxes on remote purchases, and various approaches to how it might be done.

Brian Kirkell

McGladrey principal Brian Kirkell thinks there will finally be movement this year, given some of the proposals at last month’s congressional hearing. “I think two of the proposals at the hearing are telling,” he said in an interview. “The first one was to switch the sourcing rule in the Marketplace Fairness Act to be origin sourcing rather than destination sourcing. The way the Marketplace Fairness Act was written, the sourcing rule says that the seller has to collect and remit sales tax based upon where the purchaser is located, which is why there are costs associated with it. You have to understand and implement software and relate it to all the tax laws everywhere you sell to somebody. With origination sourcing, on the other hand, you would collect and remit sales tax based on where your business is located.”

However, Kirkell doubts that proposal will go very far. “In the end it would force a complete change in the sales tax system across the states,” he pointed out. “What it would do is businesses would then have an incentive to locate in states without a sales tax. Ultimately it would be the federal government legislating in a manner that would create an incentive for businesses to move from one state to another, which is bad tax policy. Ultimately I think that is a highly unlikely outcome.”

Another option would be for the federal government to help states collect the use tax. “The other thing that was proposed in the hearing was to have the federal government help the states enforce the use tax, which brings us full circle,” said Kirkell. “The whole issue was the states weren’t enforcing their use tax, which created this problem.”

The proposal was that the IRS would collect the necessary information through the federal income tax return, collect the use tax and then remit it to the states, with some portion used to cover the costs.

“Ultimately I think that there will either be a push to pass the Marketplace Fairness Act in the current form it’s in, but with changes to the threshold numbers and some of the approaches,” said Kirkell. “If that’s the direction that the House goes, I think it won’t pass, but there is an interest in exploring this use tax approach. I think the Marketplace Fairness Act as it stands and the use tax approach are going to be discussed heavily this year, and I think there will be enough pressure on the House Judiciary Committee to put something out. What we see them put out in what I guess would be the next six months is going to be telling because if they put out just an unpalatable change to the Marketplace Fairness Act as it currently stands, it won’t get through the House. If they try to propose something really revolutionary, it won’t be supported by the states. If they try to provide federal support for something the states can already do, you might see broad-based bipartisan support.”